AnalystsTalkRates,Economy,Recession,and2019

Experts from two different firms—Equifax and Moody’s Analytics—discussed during a recent webinar what may be in store for 2019 and 2020 when it comes to data indicators linked to the future health of the U.S. economy, consumers, businesses, and other national affairs.

Equifax’s “U.S. Economic and Credit Trends 4Q 2018 Outlook” took participants on a journey through the minds of economists, monetary policymakers, and financial market analysts as they try to calculate how soon the current growth cycle will start signaling a transition.

The following spotlights viewpoints from Cristian deRitis, senior director of Moody’s Analytics, and Amy Crews Cutts, senior vice president and chief economist for Equifax, so your credit union can plan appropriately:

The job market will remain solid in 2019 as it has the past year, but in 2020 it will probably start weakening due to fading fiscal stimulus by the government (tax cuts) and higher interest rates in the marketplace.

Out of 18 economic indicators to flash the “recession” signal, 15 are “low.” Two are flashing “medium” (the yield curves on a 10-year Treasury bond to both a 2-year treasury and 3-month treasury). And one is flashing “high”—the unemployment rate. (Many economic growth cycles in the past have dipped into recession within three years after the unemployment rate stoops to 4.5 percent, which puts current projections for a recession at about mid-2020)

If the economy continues growing nine more months (and it probably will), this event will be recorded as the longest economic expansion in modern history (late 1800s – present).

Regarding a yield-curve inversion on the 10-year Treasury bond compared to shorter-term treasuries: “The feeling during my recent visit was that you have to have an inversion before a recession,” said Crews Cutts, who discussed her meeting with fellow members of the National Business Economics Issues Council at a recent event. “As the Federal Reserve pushes up short-term interest rates, it’s a slow process during which they don’t always have great information as they make that decision. They realize they’re working with a blunt instrument. Bond prices react faster as the financial markets see things happening, and therefore the top-end of the yield curve will be coming down—not the bottom end. The top comes down to meet the low-end of the curve.”

The Wall Street Journal’s September survey of economists showed a division into “two camps” regarding a possible yield-curve inversion: “On one hand, an inversion will come before a recession, which will take place in mid-2020,” Crews Cutts said. “But another camp says there won’t be any inversion, that yields will take off and the spread is going to get wider and wider. Part of the argument here is that huge corporate bond re-issuance will be taking place over the next two years and will push up bond yields.”

Unlike the Great Recession of 2007 – 2009, consumer households won’t be the root cause. And even though the U.S. government’s current and future projected debt levels seem too high, this won’t be a cause either (since global investors “will always” buy U.S. debt). “So this leaves us with a third category: non-financial corporations,” deRitis said. “This is where we think the greatest risk lies. Leveraged lending to businesses is what we’ve seen a lot of recently—some are even overly leveraged. Higher payments in the future may trigger the next recession. This is where we need to focus our attention.”

Consumer credit demand going into 2019 is still “quite favorable,” deRitis said, but with some caveats. “The labor market continues to grow, although things will most likely be slowing down on the job creation front. It feels like we could be entering a turning point. We’ll have some opposite, competing forces that are going to determine the demand for credit when it comes to new loan originations, or drawing on existing lines, or other types of revolving products.”

U.S. consumer debt is at record highs ($13.4 trillion today versus $12.8 trillion in 2008), but only in nominal terms. When adjusted for inflation, the picture changes: $10.9 trillion today versus $12.2 trillion in 2008.

Sources of U.S. consumer debt have changed dramatically since 2007: today the “highs” are student loans ($1.4 trillion) and auto loans ($1.3 trillion). The “low” is in home equity ($500 billion). And the relatively “flat” areas are first mortgages ($9 trillion), credit cards ($800 billion), and personal loans/consumer finance ($100 billion).